Saturday, September 22, 2007

The cost of tax expenditures approximate the level of total discretionary spending, “yet relatively little is known about the effectiveness of tax incentives in achieving the objectives intended by Congress,” Walker told the panel. He said too little attention is paid to those tax provisions — which are tax exemptions, deductions, credits and preferential rates in the tax code. He noted that the mortgage interest deduction alone cost the government $68.3 billion in lost revenue in 2006, more than the $42.4 billion spent on HUD. But while HUD programs get a performance review from OMB each year, there is no equivalent check on the effects of tax policy. Congress and administration should develop a system of periodic review of tax policies to “identify and mitigate against mission fragmentation, overlap, and conflict, as well as service gaps,” Walker said.

Walker also said the unintended consequences of tax breaks are not well examined, citing health insurance as an example. The tax exclusion for a company that buys health insurance premiums for its employees cuts costs for those employees, while increasing the tax burden on those who purchase their own insurance. CBO Director Peter Orszag also highlighted the impact of tax policy on health insurance, calling it the “most prominent example of a tax expenditure that appears to be inefficient.” The tax preferences for an average worker amount to a government subsidy of more than 30 percent of the cost of health care provided through employer-sponsored insurance, he said. “By reducing the price of that insurance, the tax subsidy encourages workers to purchase coverage through their employer and to secure more-extensive policies, increasing the share of costs that is covered and decreasing the share that is paid out of pocket.” That, he said, helps to inflate health care spending.

Here's a link to the referenced testimony of Comptroller General Walker. Here's one for CBO Director Peter Orszag. First off, let me object to the choice of verbs. It may be repetitive to note it, but tax breaks don't 'cost' the government revenue; taxes cost the taxpayers. That said, it only makes sense to do the best we can to understand the effects of tax breaks intended to promote certain outcomes. How much does the federal government 'spend' in the form of tax breaks, intended to promote desired outcomes? This chart from Walker's testimony is illustrative and surprising:

The chart confirms that our government 'spends' more on tax breaks than it does in discretionary spending. (Entitlements meanwhile, grow inexorably -- but let's leave that for another post.) As a conservative, I want simplicity in the tax code whenever possible, and I want the smallest tax bite possible. If a given tax break is not achieving the desired goal, it should be eliminated in favor of overall tax reduction. To do that however, I need an assessment of the effectiveness of tax breaks.

The biggest tax break, according to Walker, is the incentive for employer-provided health care -- $188 billion annually. And what do we buy with that money? The screwed-up system we currently have -- which subverts patient choice, encourages higher health costs, and drives providers mad. That's why many free-market health care reform plans begin by repealing the existing tax preference.

What about other such preferences? There's a significant amount of attention to the federal government's discretionary spending, but relatively little to the revenue foregone in the tax code. It's worthy of greater scrutiny.